Mutual Fund News

Fee'd me

Most Canadian mutual fund fees are fat. The ones for managing cash are positively gluttonous

Friday, March 28, 2003

Burned in the stock market recently? Or perhaps you have a big chunk of spare cash and don't know what to do with it.

You could, of course, put your cash in a chequing account and get a whopping 1/20 of 1% interest per year. Or you could put it in a money market fund, which typically invests in 90-day Government of Canada treasury bills and safe, short-term commercial paper. Like any mutual fund, there are fees-the fund's management expense ratio (MER), which is expressed as a percentage of the fund's assets and is deducted before the investor's return is calculated. Fund companies spend that money on management fees, fees for investment advisers, accounting, administration and other odds 'n' sods.

How hard is it to manage a money market fund? It's monkey work: Check the T-bill rate in the newspaper, invest, wait 90 days and invest again. No analysts' reports to read, no weirdo balance sheets to examine. The only overhead is a pen and a pad.

But check the fees. Look at what I call the "fee'd me ratio"-the portion of your profits the manager keeps for rolling over those risk-free T-bills and paper. Here's the formula: Take the MER, divide it by the latest total annual return (the MER plus your return) and multiply by 100. The average for money market funds is about 40%. If they're keeping more than 30%, you're getting hosed.

At the low end, you'll find an SEI Investments money market fund with an MER of just 0.2% and one-year return of 2.52%-a fee'd me ratio of 7.4%. But you have to invest at least $150,000. TD Premium Money Market Fund has a fee'd me ratio of 11.8%, but the minimum ante is $250,000.

Now, let's go to the fee'd me max. The Acuity Money Market Fund has a one-year return of 0.21% and an MER of 2.43%. That's a fee'd me ratio of 92%. In other words, for every dollar in interest your cash earned, the fund company took 92 cents. Sweet! Some other fee'd me gluttons: the Maritime Life Money Market-C fund, 77.7%, and the Co-operators Money Market VAII, 80.9%.

A high fee'd me ratio is partly the result of a so-called trailer fee the fund company pays your adviser every year. It's an incentive to keep you in the fund. In many cases, advisers are getting more interest than you are for doing practically nothing. Most could recommend that you buy commercial paper or T-bills directly, but with no fees, they don't.

What about these new animals called structured savings products? Beware: Some are perpetual fee machines. Take a new product offered by BluMont Capital Corp., a Toronto hedge fund company that employs several industry heavyweights, including chief investment officer Veronika Hirsch. In January, BluMont teamed up with U.S. giant Citibank to launch the sexy-sounding BluMont Man-IP 220 Series 1 notes, a product that appeals to both fear and greed. There's a money-back guarantee if you hold on until 2013. In the meantime, you get the potential upside of some white-hot hedge fund managers.

When you cut through the mumbo jumbo, here's how the notes work. For every dollar you invest, 60 cents goes into a low-risk, no-brainer zero-coupon note. It's basically a bond that pays no interest, so it's sold at a discount to its face value-in this case, about 60 cents on the dollar. In 10 years, it repays the face value, which is how BluMont can offer the money-back guarantee.

The other 40 cents you invested-the managed money portion-goes into two hedge funds. BluMont also borrows another $1.20. This gives you leverage, but you pay fees on your investment and the borrowed money.

BluMont president Paul Perrow admits the notes are a "premium fee product." Suppose the managers earn a practically unprecedented gross return of 20% every year for 10 years on the managed money portion. Because the instrument is levered, you pocket 18% per year. But total fees are-get this-14% per year, a fee'd me ratio of 44%. If the manager returns a still-lofty 10% per year, the return to the investor would be about 3.5% and the fees 10.5% per year. That's a fee'd me ratio of roughly 75%.

But you could get the $1 back in 10 years by giving 60 cents to any credit-worthy sketchball who issues a zero-coupon instrument. Use the other 40 cents to buy stock in Britain's Man Group PLC, which manages the hedge fund portion of the BluMont notes.

Wanna make it even simpler? Open a T-bill account or a commercial paper account at a bank with as little as $25,000. The bank will take just a small fraction of the yield as a fee. In the United States, you can buy T-bills directly from the government at http://www.treasurydirect.gov for no fee. Wouldn't that be nice here?

Doug Steiner is a managing partner in Venturion VGI, a Bay Street investment fund. He can be reached at dsteiner@globeandmail.ca